Value stocks outperformed growth stocks last year, while the opposite is true so far this year.
So what’s an investor to do? Morningstar says both the growth and value categories are undervalued as a whole for the stocks it covers. The firm measures valuation based on its fair value estimates.
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Growth stocks as a whole are trading at a discount of 10% to fair value, and value stocks are trading at a 17% discount, according to Morningstar.
Its chief U.S. market strategist Dave Sekera picked three undervalued growth stocks that he likes and three undervalued value stocks.
Growth Stocks
Amazon (AMZN). Morningstar assigns the company a wide moat. It defines moat as a durable competitive advantage. Morningstar puts fair value for the stock at $137. It recently traded at $100.
Amazon was under a lot of pressure through most of 2022, but it appears the stock has bottomed and is making a comeback, Sekera said. He expects buoyant revenue growth from the retail unit this year.
Crowdstrike (CRWD), a cybersecurity company. Morningstar gives it a narrow moat and puts fair value at $156. It recently traded at $130.
Cybersecurity is an attractive investment area and will grow for a long time, Sekera said. Corporations need to protect themselves against geopolitical events, ransomware and hacking. Cybersecurity now accounts for a small percentage of corporate information-technology budgets, he said.
Salesforce (CRM), an enterprise software company. Morningstar assigns it a wide moat and puts fair value at $245. It recently traded at $189.
Morningstar analyst Dan Romanoff thinks Salesforce represents one of the best long-term growth stories in the software space, Sekera said. Romanoff sees 20%-plus compound annual growth for revenue and earnings over the next few years.
Value Stocks
Citigroup (C). Morningstar gives the bank no moat. It puts fair value for the stock at $75. It recently traded at $47.20.
With its large discount to Morningstar’s fair value, this is a “deep-value stock,” Sekera said. Typically Morningstar prefers companies that have an economic moat. But Citigroup is trading at a big enough discount to provide investors safety, he said.
Verizon Communications (VZ). Morningstar assigns it a narrow moat and puts fair value at $57. It recently traded at $39.45. Sekera likes the company’s 6.63% dividend yield.
While Verizon will likely gradually lose some market share, with the merger of Sprint and T-Mobile, wireless competition will start to rationalize, he said. That means more stable pricing, helping Verizon’s revenue.
3M (MMM), the industrial conglomerate. Morningstar gives it a wide moat and puts fair value at $131. It recently traded at $104.60. Sekera likes the yield here too: 5.84%.
“The market is overestimating potential losses that the company could incur from several ongoing lawsuits,” he said. “But the company is built on intangible assets and cost advantages, which really drive that moat.”
The author of this story owns shares of Amazon, Salesforce, Verizon and 3M.
